Moody's says euro crisis a recovery risk

THE ONGOING euro zone crisis is one of the greatest risks to global recovery, according to a report from Moody’s.

The ratings agency said growth in emerging economies would slow more than previously expected, while growth for the year would lag behind that of 2011 and 2010.

The report was an update to the agency’s Global Macro Risk Scenarios report in April.

It focused on the risks to the global forecast, which it said remained to the downside and had risen compared to earlier in the year.

Among the major threats are a deeper-than-expected recession in the euro zone, which could be triggered by further shrinking credit in the region, and the risk of a hard landing for China, India, Brazil and other emerging economies.

The agency is currently predicting a mild recession for the euro zone in 2012.

“We are revising downwards our forecast for these large emerging market economies, where the weaker external environment and decelerating domestic demand are causing a slowdown in growth momentum,” Elena Duggar, Moody’s group credit officer for sovereign risk, said.

“We continue to expect that the slowdown in advanced economies and volatile capital flows will suppress growth in emerging markets.”

The report said the euro economy as a whole would shrink by 0.5 per cent in 2012, although there would be “significant divergence” across the region.

“We continue to expect that stressed financial conditions and further fiscal tightening measures will remain a sizeable drag on euro area growth, while funding strains and increased capital requirements for banks will continue to weigh on bank lending,” the report added.

Geopolitical risks could also lead to higher oil prices, while the threat of sharp fiscal tightening in the US next year also poses a risk. However, the report predicted “relatively robust” growth in the US this year.

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The emerging economies within the G20 are expected to grow by 5.2 per cent this year, down from previous predictions of 5.8 per cent. Next year, growth will pick up to 5.7 per cent, although previous estimates expected 6 per cent.

For the G20 economies as a whole, the recovery will be more modest. The agency has forecast growth of 2.8 per cent for the year and 3.4 per cent in 2013.